Thursday 7 April 2011 14.11 EDT
First published on Thursday 7 April 2011 14.11 EDT

Debt-ridden consumers across the eurozone face higher borrowing costs after the European Central Bank shrugged off the Portuguese bailout to press ahead with its first interest rate rise since 2008.

Despite Lisbon's decision on Wednesday to turn to its eurozone neighbours for an emergency loan, the Frankfurt-based central bank stuck to its carefully-signalled plan to push up rates by a quarter percentage point, from 1% to 1.25%.

ECB president Jean-Claude Trichet told a press conference after the decision that it was "warranted in the light of upside risks to price stability", adding: "It is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term."

The ECB's move contrasted with the wait-and-see approach of the Bank of England's monetary policy committee, which opted to keep interest rates on hold at their record low of 0.5%, amid signs of continued weakness in the economy.

Trichet warned that the risks to eurozone inflation remained and stressed that monetary policy is still "accommodative" in a hint that – as the markets expect – the ECB could raise rates further.

Trichet stressed that no decision had yet been made about any future hikes, but investors believe the increase will be the first of several, pushing up borrowing costs across the17-member zone to around 2% by the end of 2011.

"There is increasing risk that the ECB might go with the next 0.25 percentage point hike before July and that further rate hikes might follow in the reminder of the year," said Jürgen Michels of Citi.

Strong demand in Germany, Europe's largest economy, and rocketing global oil prices helped to lift inflation to 2.6% last month, above the ECB's 2% target. But with many smaller eurozone members, including Portugal, Greece and Ireland, still struggling to emerge from recession, analysts warn that the rate rise could exacerbate the economic tensions within the single currency zone.

"Even a small rise in rates – and its effect in supporting the euro exchange rate – will only pile further pressure on the uncompetitive, debt-laden peripheral economies," said Ben May, European economist at consultancy Capital Economics.

Trichet also called on Europe's fragile banks to raise more capital in financial markets to ensure that they can continue to boost lending and support the recovery: "Where necessary, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation."

With inflation at 4.4%, there is growing pressure for the Bank of England to follow the ECB's lead. Three members of the MPC voted for a rate rise in March, and Andrew Sentance, leader of the hawkish camp, has warned that the Bank's credibility will be damaged if prices spiral out of control.

However, with the National Institute of Economic and Social Research warning that the underlying growth rate of the economy – excluding the impact of the weather – is likely to have been just 0.1% in the first quarter of the year, some analysts are warning that the "window of opportunity" for a rate rise will soon close.

"It's not obvious that clear evidence of the need for a rate hike, or rather sufficient reassurance with regard to the strength of the recovery, will emerge in the next few weeks," said Stuart Green, UK economist at HSBC. "Indeed, should wage growth stay well contained, as we anticipate, and indicators of consumer confidence and spending intentions hold the currently depressed levels, then the window of opportunity for a near-term rate hike could be closing rather than increasing."

John Hawksworth, chief economist at PWC, said it was right for the Bank to keep rates lower than in the rest of Europe because of the scale of the government's spending cuts: "The UK is facing a much tougher fiscal squeeze than the average for the euro zone, so it makes sense for monetary policy to be somewhat looser in the UK to compensate."